Eventually, plant assets need to be replaced.
The most-common reasons are they wear out or become obsolete
or just become too costly to continue to repair.
Generally there are three ways to dispose of plant assets.
The first is to scrap or retire an asset.
The second is to sell an asset.
The third is to trade or exchange
an old asset for a new one.
This video will focus on the accounting
for selling an asset.
When we sell a plant asset, there
are a few steps we need to do in order to make
the proper journal entry.
The first step is to record depreciation expense as
of the scrap date.
It is unlikely that accumulated-depreciation
account has the correct balance already.
Next, we need to remove the asset from our balance sheet.
We do this by zeroing out the plant
asset and the accumulated-depreciation
account.
Finally, we need to record the amount
of cash we sold the asset for and any gain or loss related
to the selling of an asset.
Let's look at an example.
Charlatans UK sells an old delivery truck
on June 30, 2018 for $6,000.
The truck's original cost was $40,000.
As of December 31, 2017, the total amount
of accumulated depreciation was $35,000.
Annual depreciation is $5,000 per year.
So let's first get the depreciation up to date.
What is the journal entry to record depreciation expense?
The adjusting entry to record depreciation expense
is a debit to the account depreciation
expense and a credit to the account accumulated
depreciation.
In this example, if the annual amount of depreciation
on the truck is $5,000 and we need to depreciate it
for half a year, then the amount needed to be recorded
is $2,500.
Once I've posted this journal entry,
you can see the new up-to-date balance in accumulated
depreciation is $37,500.
All right, so now let's record the journal entry
to sell this asset on June 30.
I think the simplest way to record disposal of asset
journal entries is to start with the accounts and the amounts
you know.
In this case, we need to debit cash for $6,000
that we sold the truck for.
Also, we need to debit accumulated depreciation
for the balance of $37,500.
This will remove depreciation-- excuse
me, accumulated depreciation from the books.
We also need to credit truck and its balance of $40,000.
This will remove trucks, or truck from our books.
So you can see the journal entry doesn't balance.
We need a credit of $3,500 to make it balance.
In this case we incurred a gain when selling this asset.
Gains are like revenues.
They have a normal credit balance
and they increase net income.
When the fair-market value of an asset
is greater than the book value of an asset,
then we have a gain.
The amount of the gain is the difference
between the fair-market value and the book value.
But it's also the plug number needed to make this journal
entry balance.
So you could have correctly arrived
at a gain of $3,500 for the sale of asset either way.
Finally, what if I changed this example
so that the old truck was sold for $2,000 rather than $6,000?
Let's see what changes and what doesn't change in these journal
entries.
The adjusting entry to get depreciation recorded up
to date is exactly the same.
Therefore the ending balances in the truck account
and accumulated-depreciation account are exactly the same.
Again I'm going to start with what I know.
So I enter cash, accumulated depreciation,
and truck into my journal entry.
But notice now that I'm not missing a credit
to make this balance, I'm missing a debit.
Recall that losses have normal debit balances.
I need to record a loss of $500 on the sale of this asset.
The loss is $500 because the book value of $2,500
is greater than the fair value of $2,000.